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Tax Complexity a Major Headache for Small Businesses Online

For a lot of small businesses in America, taxes are not just an expensive hassle but a scary, anxiety-inducing ordeal. Taxes are the number-one concern for small businesspeople in general, and especially so for the smallest entrepreneurs—individuals with a one-person business that may not even be their full-time living.

Some Members of Congress were poised to make that burden even heavier recently, when it seemed as though pro-online sales tax legislation was about to be added to the “must-pass” omnibus budget bill approved last Friday. As my colleague Jessica Melugin notes, allowing states to expand their sales tax authority online would turn into a small business-killing tax hike:

Right now, sales taxes are only assessed on purchases when the seller has a physical presence—like a warehouse, store, or office—in the buyer’s state. This is because the seller is the legal taxpayer, so the status quo is a “no taxation without representation” situation, not a special loophole set up for Internet retailers, as is sometimes claimed.

The RTPA [Remote Transactions Parity Act] seeks to get rid of that physical presence limit on state taxing powers. It would let states reach outside their geographical borders and compel another state’s business to calculate, collect, and remit to that first state. The cost of that tax will usually be passed along to the customer and will feel like a tax increase to consumers.

Fortunately, cooler heads prevailed and the RTPA did not become part of the omnibus bill. Hopefully, that will be the last we see on this issue this congressional session, given that the U.S. Supreme Court will likely issue a decision this year in South Dakota v. Wayfair, Inc., a case that will test the idea of limiting a state’s tax and regulatory powers to within its geographical borders. That decision may rewrite the ground rules for the entire world of online sales.

This question of where an online merchant is required to collect sales tax is especially important to small sellers on platforms like eBay and Etsy who may be experts in vintage denim and whimsical cufflinks but not state tax law. They need to be able to sell anywhere in the country to build their business, but would be buried in compliance paperwork—and face potential legal threats—if they had to calculate and collect sales taxes for each of the nation’s thousands of state and local tax jurisdictions. In addition, the proposed small business exemptions based on gross revenue are generally too small for people with large sales volume but extremely low margins.

Fortunately, a lot of people in the tight-knit online seller/reseller community are willing to share their tips and strategies for taming the tax beast. Above, eBay and Amazon reseller Steve Raiken interviews certified public accountant Anna Hill as part of his “Green Room” series of tutorials. Below, the online shoe reseller known as the Six Figure Sneakerhead gives some solo advice from his own experience. Videos like this are often webcam-only affairs without fancy edits or graphics, but the information is no less valuable for their bare-bones style.